Bhutan: Economy

Growth in the gross domestic product (GDP) of Bhutan in Fiscal Year 2014 (ended 30 June 2014) is estimated at 6.0%, as projected in the Asian Development Outlook (ADO) 2014 in April, marking a recovery from 4.2% growth a year earlier. Hydropower sales grew by nearly 9%, and tourism continued to expand with earnings increasing to $66 million, or 3.5% of GDP. Despite bans on credit for transport and construction that aim to curb imports and the resulting drain on Indian rupee reserves, bank lending picked up to 11.3% as credit to trade and manufacturing grew, offsetting declines in the restricted sectors. Support to the economy is being provided by a stimulus package worth Nu500 million financed by India. The funds are being made available to banks for priority lending to potential growth sectors such as small and cottage industries. Over half of the package, estimated at about 3% of GDP, was rolled out in FY2014 and provided important impetus to growth.

Selected economic indicators (%) - Bhutan 2014 2015
ADO 2014 Update ADO 2014 Update
GDP Growth 6.0 6.0 6.8 6.8
Inflation 10.2 9.6 8.5 8.5
Current Account Balance (share of GDP) -28.6 -24.8 -26.4 -29.9

Source: ADB estimates.

Barring any geological difficulties, the large program of hydropower construction and the removal of credit and import restrictions from September 2014 are expected to boost consumption and trade and thereby support economic growth at 6.8% in FY2015, as projected in April. The start of operations at the Dagachhu hydropower plant will augment generation and bring economic benefits.

Inflation peaked at about 11.3% in the second quarter FY2014, driven by higher domestic food prices and the pass-through of high food prices from India, which supplies about 80% of Bhutan’s imports. Inflation has since moderated, to 8.5% in the last quarter, as food prices eased in India. Inflation averaged 9.6% in FY2014, which is slightly lower than forecasted, and is expected to ease to 8.5% in FY2015, as projected earlier and reflecting moderation in consumer prices in India.

Imports of materials for large hydropower projects keep current account deficits high, estimated at 24.8% of GDP in FY2014 (lower than forecast in ADO 2014) and now projected to widen to 29.9% in FY2015, somewhat higher than the earlier forecast. These revisions accommodate changes to the project construction timetable. Adequate financial and capital flows are expected to sustain a surplus in the balance of payments. However, there are risks of delay in receiving grants and other funds, which demand enhanced financial monitoring and coordination with development partners.

Source: ADB. 2014. Asian Development Outlook 2014 Update. Manila.